Direct material cost includes the cost of material, indirect taxes, Transport, storage

and delivery charges, packing and container charges less quantity discount and trade

discount

Direct MaterialDirect materials are those materials which are

directly identifiable and traceable as a part of the final product.◦ It may be raw material like wood used in making

tables and chairs,◦ Component parts used in a product ,e.g., tyres and

tubes in a car,◦ Any material used in primary packing of the products,

like cans for tinned food and drink.Materials cost constitutes a prime part of the total

cost of production of manufacturing firms. There fore it becomes very important to have efficient control of materials. Materials control basically aims at efficient purchasing of materials, their efficient storing and efficient consumption.

Material stock controlOrderingPurchasingReceipt StorageIssues

Bill of material It is prepared by the Engineering/ Planning

department. Bill of material acts as an authorisation to the stores department in procuring the materials and the concerned department in material requisition from the stores. It is circulated to the following departments:

Purchase Department Stores department Cost Accounts department Production department

Bill of materialJob No. : Si.No:Job starting date: Date:Job Finishing date:

Si. No.

Material code

Description

Size/units

Qty. Issues Particulars

Date Qty. Rate(Rs.)

Amount (Rs.)

Requested by Checked by Approved by____________ __________ ___________

Purchase Requisition Note (prepared by stores)Si NO.: Date :

Material code

Description

Size Qty.

Job/Deptt.

Delivery Purchase Order

Date Place No.

Rate Supplier

Authorised signature ______________

Other documentsPurchase order Material Inspection NoteGoods Received NoteStores/Material requisition noteMaterial Transfer noteMaterial return NoteBin CardStores ledger

Bin cardBin No. : Maximum Level:Material code No. : Minimum level :Material Description : Re-Order Level :Stores Ledger No. :

Receipts Issues Balance Remarks

Date G.R.N. No

Qty.Units

Date Req. No Qty. Units

Qty. units

Methods of Pricing Material Issues:Actual Cost methodFirst in First out method (FIFO)Last in First out method (LIFO)Simple Average Cost MethodWeighted Average cost methodStandard Cost MethodBase Stock MethodMarket Price Method

ILLUSTRATION-1From the following information prepare a Stores

Ledger Account under FIFO and LIFO method:

1-1-2003 Opening Stock 1000 units at Rs. 5 each.

5-1- 2003 Purchased 900 units at Rs.6 each.10-1-2003 Issued 1200 units.12-1-2003 Purchased 800 units at Rs. 6.20 each.15-1-2003 Purchased 300 units at Rs.6.40 each.19-1-2003 Issued 400 units.22-1-2003 Issued 600 units.27-1-2003 Purchased 200 units at Rs.6.50 each.31-1-2003 Issued 600 units.

LIFO AND WEIGHTED AVERAGE METHOD

Prepare ‘stores ledger’ and enter the following transactions adopting the FIFO and weighted average method of pricing out issues:

Sept.1 Opening balance : 50 units at Rs.30 per unit5 Issued 2 units7 Purchased 48 units at Rs. 40 per unit9 Issued 20 units19 Purchased; 76 units at Rs. 30 per unit24 Received back 19 units out of the units

issued on 9th September27 Issued 10 units

A case of shortage of inventoryFrom the following information select the most suitable

method of pricing materials issues and write up a Stores Ledger Card based on LIFO method:

Jan.20031 Opening balance 24000 kg @ Rs.7500 per ton.1 Purchased 44000 kg @ Rs.7600 per ton3 Issued 10000 kg.5 Issued 16000 kg.

12 Purchased 10000 kg. @ Rs.7800 per ton. 13 Issued 24000 kg. 18 Issued 25000 kg 22 Purchased 50000 kg. @ Rs.8000 per ton 28 Issued 20000 kg. 31 Issued 22000 kg.

Economic Order Quantity(EOQ)Economic Order Quantity(EOQ)

Economic Order Quantity (EOQ)EOQ =

2 x Annual Consumption X Ordering Cost

Storage(holding)cost per unit

Storage (holding) cost per unit =Cost per unit X Storage cost(%)

Fixation of Inventory levels:Re-order level:

= Maximum usage X Maximum lead timeor

= Minimum stock level + (Average or Normal usage X Average lead time)

Minimum stock level = Re-order level – (Average usage X Average lead time)

Maximum stock level = Re-order level + Re-ordering quantity – (Minimum usage X Minimum lead time)

Danger level = Average usage X Maximum re-order period for emergency purchases

Average stock level = Minimum stock level + ½ of Re-order quantity

or= ½ (Minimum stock level + Maximum stock level)

Inventory ControlABC Analysis:

Under this technique, the items in inventory are classified according to value of usage. This method divides inventory into three classes: A, B and C. Items in class ‘A’ constitute the most important class of inventories so far as the proportion (or percentage) in the total values of inventory is concerned. Items in class ‘B’ constitute an intermediate position while those in item ‘c’ are quite negligible.

Two Bin System Perpetual Inventory system Continuous Stock taking Periodic Stock taking system VED analysis FNSD Analysis Pareto Analysis JIT